Euro zone shapes up as China stutters

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London - China’s huge manufacturing engine stuttered in the early part of the year while a return to growth in French business activity this month suggested a solid, broad-based recovery was taking shape in the euro zone, surveys showed.

Weaker-than-expected readings from China pointed to a contraction in the first three months of the year and will raise market expectations of government stimulus to arrest a loss of momentum.

“It tells you something about the extent to which market concerns about a slowdown in China are justified,” said Peter Dixon at Commerzbank. “In the euro zone, the economy is bowling along at a reasonable pace.”

A solid expansion in the euro zone’s manufacturing and services industries in March, and growth in France meant the bloc’s pace of recovery barely slowed from February’s 30-month high.

But the threat of deflation was highlighted by firms’ increasing willingness to cut prices to attract customers.

China’s flash Markit/HSBC purchasing managers’ index (PMI) fell to an eight-month low of 48.1 in March from February’s final reading of 48.5. The index has been below 50 since January, indicating a contraction in the sector this year.

Output and new orders weakened but new export orders grew for the first time in four months, the survey showed, suggesting the slowdown has been driven primarily by weak domestic demand.

“Usually, for March, the PMI will rebound, because after Chinese New Year there should be some activity coming back, but this is disappointing,” said Wei Yao, a China economist at Société Générale. “The government probably will have to provide supporting measures.”

Earlier this month, sources said the central bank in Beijing was prepared to loosen monetary policy to keep the economy growing at 7.5 percent. Last year, China’s economy grew 7.7 percent, the same as in 2012.

Further confirmation of the slowdown in China pushed European shares lower yesterday, though robust data from France and Germany limited their decline.

The euro zone’s composite PMI, which is seen as a good growth indicator, edged down to 53.2 from February’s 32-month high, but Markit said it indicated a 0.5 percent economic expansion this quarter, stronger than the 0.3 percent predicted in a poll.

Having lagged behind the recovery in much of the euro zone in recent months, France’s index surged through the 50-point threshold to reach its highest level since August 2011, while German composite figures showed growth slowed from February’s 33-month high but remained strong.

Worryingly for policymakers, firms have discounted prices to drum up business for two years – and did so at a steeper rate than in February.

Inflation across the currency union was 0.7 percent in February, well below the European Central Bank’s 2 percent target ceiling, and the latest PMI will do little to allay fears of deflation in the region.

The European Central Bank has little room to manoeuvre, having slashed its main interest rate to near zero and given more than e1 trillion (R15 trillion) of cheap cash to banks for three years. It held policy steady when it met earlier this month. – Reuters


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